Jersey & Guernsey
Law Review – February 2013
Shorter articles
State-owned companies are not the
state
Justin Harvey-Hills
The article
examines an important decision of the Judicial Committee of the Privy Council
on appeal from the Court of Appeal of Jersey as to the position of state-owned
corporations and the circumstances in which they and their assets may be
equated with the state and its assets.
1 On 26 July 2012, the Board of the Judicial
Committee of the Privy Council (the “Board”) handed down judgment
in the case of FG Hemisphere Assocs LLC v La Générale
des Carrières et des Mines
SARL.
2 Gécamines
is a mining company which is 100% owned by the Democratic Republic of Congo
(the “DRC”) (formerly known as Zaire
and, prior to 1960, as the Belgian Congo). The
case concerned an attempt by a distressed sovereign debt or
“vulture” fund, FG Hemisphere Associates LLC (“FGH”),
to enforce directly against the assets of Gécamines
in Jersey certain arbitration awards issued by
the International Chamber of Commerce (“ICC”) against the DRC. FGH
claimed that Gécamines was an “organ of
the state” and therefore part of the Congolese state.
Background
3 The story began in the early 1980s when
Zaire, as the DRC was then known, under the notoriously corrupt rule of
President Mobutu, entered into agreements with a Yugoslavian company called Energoinvest for the construction of a dam for the
generation of hydro-electric power. In the early 1990s, Zaire began to
become politically unstable and it fell into default on the payments due under
the agreements. In 2001, Energoinvest, with the
backing of FGH, commenced ICC arbitration proceedings. In
2003, it obtained the arbitration awards and shortly thereafter these were
assigned to FGH.
4 In March 2009, FGH commenced proceedings
to enforce the arbitration awards against Gécamines
and the DRC in Jersey. The DRC had no assets
in Jersey but Gécamines had an interest in and
a revenue stream from a Jersey joint venture vehicle called Groupement
pour le Traitement du Terril
de Lubumbashi Ltd (“GTL”). FGH obtained an interim arrêt entre mains and Mareva injunction against Gécamines’ shares in GTL and current and
future payments due to it from GTL.
5 The DRC had no assets in Jersey
and did not appear. The battle therefore quickly became one between FGH and Gécamines as to whether Gécamines
was responsible for the debts of the DRC. FGH claimed that it was an
“organ of the state”.
6 At first instance, the Royal Court (Page, Commr),
held that Gécamines was an “organ of the
state” both at the time that the interim arrêt was obtained in March
2009 and at the time that the judgment was handed down.
7 On appeal, the Court of Appeal upheld the Royal Court’s
decision by a 2:1 majority (McNeill and Bennett, JJA, Pleming,
JA dissenting).
The Court of Appeal gave Gécamines leave to
appeal to the Privy Council.
8 On 26 July 2012, the Privy Council allowed
Gécamines’ appeal and overturned the
decisions of the Royal Court
and Court of Appeal.
Sovereign immunity
9 The “organ of the state” doctrine
in the enforcement context originates from two English first instance
decisions, Kensington Intl Ltd v Republic of Congo and Walker
Intl Holdings Ltd v Republique Populaire
du Congo. These decisions concerned
the enforcement by other distressed debt funds of awards or judgments against
the state-owned oil company of the Republic
of Congo (the former French
Congo or Congo-Brazzaville and not the DRC), Société
Nationale des Pétroles
du Congo or SNPC.
10 In both cases, serious allegations were
made that the Republic
of Congo and SNPC had
arranged their affairs so as to prevent the state’s
creditors from intercepting the state’s oil sales through the setting up
of a number of sham intermediary companies. It was also alleged that SNPC
itself had no true independent existence, that there was little if any
delineation of its assets and those of the state and that the state dipped into
SNPC’s assets if it chose to do so.
11 In both cases, the courts purported to
apply the doctrine of the English Court of Appeal in Trendtex Trading Corp v Central Bank of Nigeria. Neither decision dealt
with the rationale for applying Trendtex. Both decisions turned very much on their facts and
both decisions could probably have been justified on the basis that SNPC and
the other entities were shams.
12 But the issue with Trendtex was that it was a
decision on sovereign immunity and a decision which pre-dated the introduction
of the State Immunity Act 1978 (“the 1978 Act”) (which was
subsequently introduced into Jersey law by the State Immunity (Jersey) Order 1985).
13 Up until that point, English law had
applied the doctrine of absolute immunity. The Trendtex decision swept away the
concept of absolute immunity and replaced it with the concept of restrictive
immunity so that states were no longer immune in all respects, in particular
with regard to commercial dealings.
14 In Trendtex, the principal question
was whether the Central Bank of Nigeria
was part of the state and therefore entitled to sovereign immunity. The three Court
of Appeal judges appeared to accept that merely because an entity might have
separate legal personality was not necessarily determinative of the question.
15 Lord Denning, MR approached the issue on
the basis that the entity would be entitled to immunity if it were under
governmental control and performed governmental functions. Earlier in his
judgment, Lord Denning had referred to the doctrine of restrictive immunity as
giving immunity to acts of a governmental nature or “acta jure imperii”.
16 Stephenson and Shaw, LJJ asked themselves
whether the Central Bank of Nigeria
was a bank to which certain aspects of government policy had been delegated or
whether it was in reality a government ministry. This required consideration of
its constitution, its powers, duties and its activities. Shaw, LJ also made the
important point that an entity could not have “hybrid status”. It
could not be a government department for some purposes and a separate entity
for others.
17 Kensington and Walker
effectively applied Trendtex
in reverse. The rationale was clearly based on Shaw, LJ’s statement that
an entity could not have “hybrid status”. However, in neither case
was any real consideration given as to whether Shaw, LJ had intended this to
extend beyond the field of sovereign immunity or whether applying Trendtex in
reverse was justified or even workable. The position was complicated by the
fact that, following the introduction of restrictive immunity, sovereign
immunity and enforcement were no longer mirror images of each other.
18 Kensington
and Walker did not deal specifically
with the 1978 Act. Section 14(1) recognized specifically the distinction
between the state on the one hand (which comprised the sovereign or head of
state in his public capacity, the government of the state and any department of
that government) and a separate entity (which was an entity distinct from the
executive organs of the government of the State and capable of suing or being
sued). Under s 14(2), the latter would only be immune if the proceedings
related to something done by it in exercise of sovereign authority.
19 There is also the distinction between
immunity and enforcement. Under s 14(2) anyone exercising any sovereign
function was entitled to immunity in respect of the exercise of that function.
But the question of enforcement against the assets of an entity exercising
state functions does not necessarily involve the same considerations.
20 The difference between these concepts was
recognised by the House of Lords in the case of I Congreso del Partido, notwithstanding that this
was a case in relation to events that took place prior to the introduction of
the 1978 Act. The case turned on the categorisation
of certain acts of the Cuban state and whether the acts were in exercise of
sovereign authority, and thereby fell within the jure imperii and attracted immunity, or
whether they were commercial and thereby fell within the jure gestionis and did not attract
immunity. However, Lord Wilberforce also recognised
the difference between state-controlled enterprises with legal personality
acting on government directions on the one hand, and a state exercising
sovereign functions on the other.
21 The Trendtex test was also applied in
two subsequent English first instance cases on sovereign immunity, Tsaviliris Salvage (Intl) Ltd v Grain
Board of Iraq and Wilhelm Finance Inc v Ente
Administrador del Astillero
Rio Santiago.
Issues for the Privy Council
22 Two principal arguments were advanced
before the Privy Council. The first was that Gécamines’
separate corporate personality was determinative of the matter unless it could
be shown that this was one of those rare occasions when the corporate veil
could be lifted. The second was that Gécamines
was not a department of government under either s 14(1) of the 1978 Act or
under the Trendtex
test (to the extent that the two differed) and was not under governmental
control and did not exercise governmental functions.
Lifting the
corporate veil
23 It had never been asserted in the
proceedings that Gécamines was a sham. In
fact, it was accepted that Gécamines had
existed since 1967 and its predecessor, Union Minière
de Haut Katanga,
a former Belgian colonial company which was nationalised
to form Gécamines, had been in existence since
1904. It was therefore argued that Gécamines
should not be treated any differently from any other company or corporation and
that the principles recognised in Salomon v A Salomon & Co Ltd
and internationally in Case
concerning Barcelona
Traction, Light and Power Company Ltd should be applied.
24 The Board rejected this argument on two
grounds. The first was that the question of legal personality was not
determinative of whether a body was an organ of the state. Section 14(1) of the
1978 Act specifically contemplated this. Furthermore, a state could not detach
itself from what Lord Denning had described in Trendtex as the
“traditional functions of a sovereign”, such as maintaining law and
order, conducting foreign affairs and defending the realm. Thus, the question
of functions would always be important.
25 Secondly, the concept of an organ of the
state in international law would not necessarily be identical to the principles
established in domestic law.
The test for an organ of the
state
26 The Board decided that a new test should
be set out for the purposes of determining whether an entity was an organ of
the state. However, the new test has its roots firmly in the doctrine of
sovereign immunity and Trendtex.
Indeed, Lord Mance said quite specifically
that—
“It is now appropriate in both contexts to have
regard to the formulation of the more nuanced principles governing immunity in
current international and national law.”
27 Clearly, the new test would have to take
into account the introduction of s 14(1) of the 1978 Act and the fact that
entities that were not organs could still have immunity in respect of exercises
of sovereign functions.
28 The Board decided that separate juridical
status was not conclusive. However, constitutional and factual control and the
exercise of sovereign functions did not, without more, convert a separate
entity into an organ of the state. Particularly where an entity was created for
commercial purposes, the strong presumption was that its separate corporate
status should be respected. The presumption would only be displaced if the
entity had no effective separate existence. An examination of the
entity’s constitutional provisions, the state’s control over the
entity and of the entity’s activities and functions would have to justify
the conclusion that the affairs of the state and of the entity were so closely
intertwined and confused that the entity could not properly be regarded as
separate.
29 The Board said that it saw particular
value in propositions set out in State
Immunity, Selected Materials and Commentary by Dickinson, Lindsay and Loonam that the existence of state control was not a
sufficient criterion, that the possession of a range of functions coupled with
independence in their exercise would militate against a conclusion that an
entity was an organ and that caution was required before finding that an entity
with separate legal personality was an organ of the state.
International
authority
30 In considering the test, the Board had
regard to authorities from other jurisdictions and, in particular, the US
Supreme Court case of First National City
Bank v Banco para el Comercio
Exterior de Cuba (“Bancec”) the Canadian case of Roxford Enterprises SA v Cuba, two French Cour de Cassation cases concerning SNPC
and a Cameroon entity called SNH, and two South African cases: Banco do Mocambique v
Inter-Science Research and Development Servs (Pty)
Ltd and Shipping Corp of India Ltd v Evdomon Corp and
President of India.
31 The cases approached the question in
different ways but there were consistent themes.
32 In First
National, the US Supreme Court stated the basic presumption that a
state-owned corporation’s assets should be treated as separate from those
of the state. It then set out two situations where the veil could be lifted.
These were situations where control was so extensive that it amounted to a
relationship of principal and agent or where strict adherence to the
separateness of corporations would work fraud or injustice. The Board regarded
the former as more likely to be relevant where the claim was to hold the state
liable for its corporation’s activities. It regarded the latter as a
carefully tailored remedy to an extreme factual situation where the US party had
been expropriated of its Cuban assets.
33 In Roxford, the Canadian Federal
Court said that a liability of a state could only be enforced against a
state-owned entity in circumstances where there was a de facto and de jure assimilation
of the state-owned entity to the state.
34 The French cases considered whether the
respective entities were “émanations de l’Etat”. SNPC, which was the company under
consideration in the Kensington and Walker cases in England, was
found to be an “émanation”
as was SNH. In both cases, the Cour de
Cassation found that neither company had any existence separate from their
respective states. Although the Board did not expressly say so, the French
concept of “émanation”
is closely related to the French concept of “confusion de patrimoine”.
35 The South African cases did not speak
with one voice. In Banco do Mocambique,
the court applied the organ of the state concept and followed a similar line to
that of Trendtex.
In Shipping Corp, the South African
Supreme Court applied the strict Salomon
test and said that it was purely a question of whether the corporate veil could
be lifted.
36 The central themes
that emerged from these cases were the presumption that state-owned
corporations were separate entities, that corporate form should generally be
respected and that it would require some quite extreme circumstances to
displace it. These cases clearly informed the test set out by the Board.
The application of the test
37 The Board found that both the Royal Court and the
majority of the Court of Appeal had treated the Trendtex test as introducing a
too general and too easily established exception to the circumstances in which
the courts would respect the separate legal personality of a state-owned
corporation.
38 The Royal Court had decided that Gécamines was under state control. As regards
functions, it effectively decided that because Gécamines
was engaged in an area of activity of critical importance to the DRC economy
and constituted in such a way so as to assist, promote and advance the industrial
development, prosperity and economic welfare of the area in which it operated,
it could be seen as carrying out government policy in the way that a department
of state did. It therefore assumed the position of a department of government.
39 The majority of the Court of Appeal set
an apparently high test in accepting that the performance of some governmental
functions would not be sufficient but then diluted this by saying that it was
not necessary that the entity perform any sovereign acts. The majority espoused
a broad vision of government which it said could embrace activities which would
in other circumstances amount to ordinary trading activities.
40 These tests gave rise to a significant
practical difficulty which was identified by Pleming,
JA in his dissenting judgment in the Court of Appeal and noted with approval by
the Board. If all that was required was for a state-owned corporation to be
engaged in an activity of importance to the national economy, how could any
such corporation avoid being an organ? And, if this were the case, what was the
purpose of the Trendtex
governmental functions test? Essentially, the test for being an organ would
simply be a control test which virtually every state-owned corporation would
meet.
41 This is why the performance of sovereign
acts (or acta jure imperii)
by the entity is critical to the test.
The performance of acta jure imperii
42 The first question was what constituted
“acta jure imperii”.
The position of the Royal Court
and of the majority of the Court of Appeal appeared to be that the motive or
purpose of the government in constituting the entity was
relevant to the question. In other words, activities, such as mining, could be
sovereign acts if they were in furtherance of a broad goal of governmental
policy, such as economic development.
43 However, Pleming,
JA and the Board disagreed with this. First, it was not consistent with
existing authority. In Trendtex,
the Central Bank of Nigeria
was being sued on a letter of credit which related to the importation of
cement. An argument that the cement contracts were for the purposes of
constructing military barracks and therefore sovereign in nature was rejected
by Lord Denning on the basis that it was the nature and not the purpose of the
act that mattered.
44 In I
Congreso del Partido,
Lord Wilberforce, while acknowledging that the dividing line between acta jure gestionis
(or acts of private law) and acta jure imperii (or sovereign acts) was not always easy to
discern, said that the existence of a governmental purpose or motive would not
convert what would otherwise be an act of private law into a sovereign act. The
act had to be, of its own character, a governmental act, as opposed to an act
that any private citizen could perform.
45 The second question was the extent to
which sovereign acts had to be performed. In his dissenting judgment in the
Court of Appeal, Pleming, JA said that the functions
test would only be satisfied where the entity was performing predominantly or
entirely acta jure imperii
such that they were the essence of its being and it had no other existence.
While Pleming, JA’s test was formulated
slightly differently, it is very similar in practical terms to the test set out
by the Board which requires the activities of state and entity to be so
entwined and confused that the entity could not properly be regarded as
separate.
46 Ultimately, this all leads back to the
question in s 14(1) of the SIA and to Trendtex as to whether an entity
is a department of government. A department of government inevitably
predominantly undertakes acts of a sovereign nature. It can engage in private
law acts (eg
a Police Authority purchasing uniforms) but such acts are not what Pleming, JA described as “predominant” or
“the essence of what the entity does so that it has no other
existence”. This is what distinguishes a department of government from a
separate entity.
The position
of creditors
47 Another important factor in favour of a very restrictive application of the principle
is the position of creditors of the entity. Virtually all trading businesses
have their own creditors. The effect of declaring a state-owned corporation to
be an organ of the state is to make its assets available
for execution in satisfaction of the state’s debts. Effectively, the
state’s liabilities are dumped on to the balance sheet of the state-owned
corporation. Clearly, this is highly prejudicial to the existing creditors of
the business. Where a state is highly indebted, as many states are, the effect
is likely to be catastrophic to the commercial viability of the corporation.
The position
of Gécamines
48 On the basis that the Royal Court and the majority of the Court
of Appeal had applied the wrong legal test, the Privy Council regarded it as incumbent
upon it to form its own view of the facts. Naturally, the facts will differ
from case to case but there are some themes that can be drawn from the judgment
of the Privy Council and from the dissenting judgment of Pleming,
JA, with whom the Privy Council largely agreed.
49 The first is that a significant amount of
governmental control is to be expected in the operations of any state-owned
corporation. Neither Pleming, JA nor the Privy
Council regarded Gécamines’ constitution
and, in particular, the DRC government’s ability to veto certain board
decisions (the “Tutelle”),
as decisive or even particularly surprising. Nor did they appear to find
surprising the fact that the DRC government was closely involved in a different
ways in Gécamines.
50 Although they did not say so in express
terms, it is respectfully submitted that the Board viewed governmental control
of the entity, or at least extensive governmental involvement, as being of
limited importance. Clearly, if an entity meets the organ test as set down by
the Privy Council, governmental control will be a given because the entity and
the state are so intertwined as to make them indistinguishable. However,
governmental control is not, in and of itself, sufficient for an entity to be
an organ of the state.
51 The second is that, although again they
do not say so in express terms, the Board and, to some extent, Pleming, JA, clearly thought that the Royal Court and the
majority of the Court of Appeal had become involved in a forensic investigation
of a number of isolated matters to determine the involvement of the state in
the operations of Gécamines. Finding state
involvement had become an end in itself so that if some notional level of
involvement were reached, Gécamines would be
an organ of the state. It is clear from the judgments of Pleming,
JA and of the Privy Council that they did not believe that this was the correct
approach.
52 The third is that the judgments of the
Royal Court and of the majority of the Court of Appeal turned on consideration
of four isolated matters which were the fact that the DRC government had appropriated some of Gécamines’
revenue during the Congolese war between 1997 and 2003, the fact that the
mining contracts into which it had entered during that period were subsequently
re-negotiated under the auspices of a commission established by the DRC
government, the involvement of the government in a significant joint mining
joint venture, and the taking by the DRC government of certain entry fee
payments due by mining counterparties to Gécamines.
53 Neither Pleming,
JA nor the Privy Council thought that any of these factors, either individually
or collectively, were sufficient to justify a finding that Gécamines
was an organ of the state. In fact, the Privy Council expressly said that the Royal Court and the
majority of the Court of Appeal had failed to a significant degree to look at
the functions and activities of Gécamines in
the round. In particular, those courts had failed to give proper consideration
to the fact that Gécamines was a substantial
mining company with a long history.
54 Correctly, it is respectfully submitted, Pleming, JA and the Board regarded Gécamines’
accounts as an important document. They demonstrated that it had a significant
turnover, that it was party to a large number of joint venture agreements, that
documented financial obligations ran between it and the state, and that it had
its own assets and creditors.
55 It is respectfully submitted that both Pleming, JA and the Board were acutely aware of the fact
that FGH’s case was being built around a series of isolated incidents. It
was, however, vital to keep in mind Gécamines’
day-to-day existence as a mining company. This was the most critical factor.
56 The Board also went on to remark that, even
if one of the four matters had amounted to a sovereign act or the exercising of
sovereign authority, this would not have been sufficient on its own for Gécamines to be classified as an organ of the state.
Section 14(2) of the 1978 Act envisaged that a separate entity could have
immunity in circumstances where it exercised sovereign authority. This would
not justify a finding that Gécamines was
assimilated with the state for all purposes.
57 Both Pleming,
JA and the Privy Council drew a comparison between Gécamines’
activities as a mining company, which was required to buy licences
for mining concessions, and the activities of the Cadastre
Minier, which was the agency of the Ministry of Mines
that administered the system of concessions. In many ways, that comparison
summed up the distinction between departments of government and separate
entities, focusing as it did on the different nature of the
commercial acts undertaken by Gécamines and
the administrative and regulatory acts undertaken by the Cadastre.
Conclusion
58 The Board has set out a test that starts
with a presumption that a state-owned corporation incorporated for commercial
purposes is a separate entity. The party claiming otherwise will need to
produce extremely persuasive evidence that the entity has no existence separate
from that of the state and is, in effect, a government ministry. Governmental
control over the corporation will not be enough. The party claiming that the
corporation is an organ of the state will have to show that the corporation
predominantly performs acts that are, by their nature, sovereign acts, such
that they are the essence of its being. Motive or purpose are not relevant to
the classification of acts.